Court of Appeal judgment in Flynn/Pfizer pricing case: where next for pharmaceutical pricing?

The Case

In March 2020, the Court of Appeal handed down its judgment in Competition and Markets Authority v Flynn Pharma Ltd & Ors [2020] EWCA Civ 339.

In this judgment the Court of Appeal determined appeals by both the Competition and Markets Authority (the "CMA") and the Flynn Pharma ("Flynn") and Pfizer pharmaceutical groups against a Competition Appeal Tribunal (CAT) judgment in which the CAT had overturned a decision of the CMA regarding Flynn and Pfizer's pricing of genericised phenytoin sodium capsules (the "Capsules").

The CMA and CAT

In the original decision, the CMA determined that both Pfizer and Flynn had abused their dominant positions in (separate) markets for the Capsules in order to implement unfair price rises on them (the "Decision"). As a result, the CMA fined Pfizer 84.2 million pounds and Flynn 5.2 million pound.

On appeal, the CAT found that, whilst the CMA had been right to conclude that Flynn and Pfizer each held a dominant position in their respective markets, the CMA had erred in reaching its conclusion that they had abused that dominance.  In particular, the CAT held that the CMA: had not correctly applied the test for finding that the prices charged for the Capsules were unfair; did not appropriately consider the right economic value for the Capsules; and did not take account of the situation of other, comparable, products (and, in particular, of the phenytoin sodium tablet). 

As a result, the CAT overturned the fines, referred the case back to the CMA for reconsideration, and ordered the CMA to pay Pfizer and Flynn's costs, though this decision has subsequently been overturned by the Court of Appeal following the CMA's appeal on public interest grounds.

The Court of Appeal

The Court of Appeal's judgment has affirmed the CAT's overarching conclusion that the CMA needed to reconsider the abuse and fining aspects of the Decision.

However, the Court of Appeal clarified the basis on which the CMA needs to do this, and, importantly (for the CMA), emphasised the discretion available to a competition authority when undertaking economic analysis of pricing and what is "unfair" or "excessive".

In response to the judgment, the CMA has stated that it is an important step forward in clarifying the legal test for excessive and unfair pricing. It stated that it would now "carefully review the elements that the court has decided to refer back to it, as it moves forward with its case against pharmaceutical companies Pfizer and Flynn Pharma." It therefore seems likely that this judgment will provide a framework for abusive pricing investigations by the CMA in the future.

Comparator products and the United Brands Test

One of the CMA's key grounds of appeal related to the relevance of comparator product evidence adduced by Pfizer to assessing its prices, and to the test to be applied by the CMA when assessing whether the prices charged by Flynn/Pfizer were unfair.

The CMA's first ground of appeal related to its interpretation of the seminal CJEU case for abusive pricing, United Brands, which set out a two-limb test that must be satisfied for pricing to be considered abusive:

1. the price must be “excessive” - in United Brands, it was said that this could be calculated as the difference between the cost of production of the product and the selling price (the “Excessive Limb”); and
2. the price must be “unfair” either in itself or when compared to competing products  (the “Unfair Limb”).

On appeal the CMA argued that:

1. because the CMA had applied an “in-itself” test (i.e. that the Flynn/Pfizer pricing was in-itself unfair, based on a "Cost-Plus" analysis), there was no obligation upon it also to apply any alternative test (such as the “competing products” test);
2. in any event, the CMA did conduct an analysis of competing product comparators, and found that they were not appropriate; and
3. the findings of the CMA in the Decision lay within its margin of manoeuvre or appreciation when exercising its discretion, and the CAT erred in law by not respecting that discretion.

The Court of Appeal Decision

In his judgment for the Court of Appeal, Green LJ analysed the case law and commentary that has subsequently applied or analysed the United Brands test. From this, he drew together the following general conclusions about how to apply the test:

1. In broad terms, a price will be unfair when the dominant undertaking has reaped trading benefits which it could not have obtained in conditions of “normal and sufficiently effective competition”, i.e. “workable” competition.
2. A price which is “excessive”, because it bears no “reasonable” relation to the economic value of the good or service, is an example of such an unfair price.
3. There is no single method or “way” in which abuse might be established, and competition authorities have a margin of manoeuvre or appreciation in deciding which methodology to use and which evidence to rely upon.
4. Depending upon the facts and circumstances of the case, a competition authority might therefore use one or more of the alternative economic tests which are available. There is however no rule of law requiring competition authorities to use more than one test or method in all cases.
5. If a Cost-Plus test is applied, the competition authority may compare the cost of production with the selling price in order to determine the profit margin. Then the authority should determine whether the margin is “excessive”. This can be done by comparing the price charged against a benchmark "higher than" cost such as a reasonable rate of return on sales (ROS) or to some other appropriate benchmark, such as return on capital employed (ROCE). If the actual price exceeds the selected benchmark, the authority should then compare the price charged against any other factors which might otherwise serve to justify the price charged as fair and not abusive.
6. In analysing whether the end price is unfair, a competition authority may look at a range of relevant factors including, but not limited to, evidence and data relating to the defendant undertaking itself and/or evidence of comparables drawn from competing products and/or any other relevant comparable, or all of these. There is no fixed list of categories of evidence relevant to unfairness.
7. If a competition authority chooses one method (e.g. Cost-Plus) and one body of evidence and the defendant undertaking does not adduce other methods or evidence, the competition authority may proceed to a conclusion upon the basis of that method and evidence alone.
8. If an undertaking relies, in its defence, upon other methods or types of evidence to that relied upon by the competition authority then the authority must fairly evaluate it.

Applying these principles, Green LJ rejected the CMA's grounds of appeal.  On the facts of the case, there was an obligation on the CMA to evaluate properly and fairly the comparator evidence filed by Flynn/Pfizer as part of their defences.  The CMA could not ignore that evidence simply because it had, in its judgment, conducted a sufficient analysis on an alternative basis.  

With regard to any risk of the CAT's decision undermining or trespassing on the CMA's margin of manoeuvre or appreciation in exercising its discretion, Green LJ held that the CAT had not erred in coming to the conclusion that it did, as "the [CAT's] findings were made within its jurisdiction. It specified the areas where it found the evaluation lacking. It was not bound by the CMA’s margin of “manoeuvre” or discretion."

However, Green LJ did uphold one CMA ground of appeal. This related to the CAT's direction to the CMA that it “should", as part of its analysis, construct a hypothetical benchmark price or range of prices against which to measure the actual prices charged. Green LJ stated that the CAT had "misconstrued the case law" in trying to compel the CMA to use a particular type of benchmark. Whilst the CMA was required to apply "a" benchmark, there are a number of possible benchmarks that can be used, and the CAT was not right to seek to dictate which benchmark should be used.

Comment

The CMA has a plethora of similar cases focused on the pharmaceutical sector before it, and so their next steps will be closely followed.

That there is much to play for in this case is also demonstrated by the fact that the European Commission intervened in the appeal, in support of the CMA. Competition authorities across the globe have been focusing on pharma pricing and in light of the current COVID-19 crisis, this scrutiny is likely to be even fiercer. However, without the regulatory tools (and backing of the courts), competition authorities may struggle to have a tangible impact on pharma pricing in the future without going down a regulatory track.   

The Court of Appeal's decision will also provide an important framework for both the CMA and responding parties in abusive pricing investigations, as well as providing important commentary on the extent of the CAT's jurisdiction to review the CMA's actions.